Okay, hello everyone. Thank you so much for joining this session. My name's Taylor McGinnis, and I head up the SMIDCAP application SaaS coverage at UBS. And today, here with me, I have Asana's CFO, Sonalee. Sonalee, thanks so much for joining.
Great to be here. Thanks for having us, Taylor.
Of course. And then I have Aziz, who's head of strategy in FP&A. So Aziz, thanks to you too.
Yeah, thank you.
Maybe a good place to start, since you guys just reported last night and were very kind to come here right after reporting. Maybe you could just give a little recap of the Q3 earnings call. You guys had a nice beat in the quarter, raised the Q4 numbers, and maybe you could just talk about what you think are the key takeaways for the group.
Yeah, sure. Thank you. And you're absolutely right. We reported, we did the callbacks, and then we jumped on a flight. So here we are in beautiful Scottsdale. So a couple of things we're really proud about in the quarter. One is, as you say, it was a beat and raise quarter, which as a CFO, you always love. And that was on the revenue side. So we beat the high end of our revenue guidance. We grew 9% year-over-year, 9.3% actually year-over-year. And we also had record operating margin, 8% operating margin. And I think what's the most exciting about that is it was a 12% increase year-over-year. We also had great cash flow. We had NRR that stabilized.
And what's important to me there is that in quarter NRR, which is something that I pay a lot of attention to because I think it's more of a leading indicator as opposed to reported NRR, which is a lagging indicator, we had in quarter NRR improve for the second consecutive quarter. And that led me to comment on the, in my prepared remarks, that we are at or near a bottom on NRR. And that's the first time I've said that. So I think that's a really key takeaway. And then finally, hopefully you're going to ask us a lot about AI and our new products, but AI Studio, we saw another quarter of sequential growth there, solid sequential growth. So we're super excited about the impact that that will have as we look ahead.
Perfect. Yeah, and I'd love to touch on the improvement in end-period NRR because I think that was the highlight of the print, and I know investors have been waiting for that trough. Could you just talk about what's giving you comfort that you're at or nearing that bottom, and how do you think about the drivers of that metric as you look ahead?
Yeah, great question, and by the way, that was the number one question in our one-on-ones today, so I think everyone is focused in the right area, so a couple of things that drove that. Firstly, we saw an improvement in GRR across every cohort. Secondly, we saw an improvement in NRR, and the largest improvement in NRR in our 100,000+ customer cohort. Thirdly, we saw a really big improvement in terms of renewals, and in particular tech renewals, which was something I had called out in Q2 as being a potential risk, and let's just say those renewal conversations went better than feared, and in fact, certain renewals in the tech sector in particular, which has and continues to be a headwind for us, were not just flat renewals, but turned out to be expansion deals because of the new products.
So expansion on seats and also AI Studio and what we call FSP or Foundational Service Plans, which are a new product in motion for us, and that's basically paid services. So taking all of that combined helped to drive that higher. And then the last point I would make is in our monthly business, our small business, which is the churniest part of our base, we saw 12-month highs in terms of retention. So it was like strength across the board and two consecutive quarters that really gave me the confidence to make that comment. And we choose our words really deliberately in prepared remarks. I'm sure you all know that, but I think people really picked up on that, and I think that absolutely is the takeaway.
And as we think about it going forward, I said at or near the bottom. I do feel like the trends, and I looked at where we are now as of kind of our earnings print, we expect those trends to continue. And there are some really great initiatives we put in place. Over the last year, we hired a new Chief Customer Officer, and those plays that he's initiated around customer satisfaction, around the coverage model, like the number of customers within our base that actually get customer success managers, that is all really playing out as we had hoped. So as we look ahead, we're feeling good about that and more confident than we were a quarter ago.
Yeah. I want to talk about the tech vertical because the tech vertical, to your point earlier, had been the main source of some of that pressure as it was for a number of other software companies, given all the right-sizing and optimization activity that's occurred over the last couple of years. So in terms of what's giving you comfort as we look ahead that we're maybe past the worst of it, why is that? Is it that now these companies have gone through a number of renewals, you're now beyond that? Is it that there's more cross-sell opportunity with these AI solutions? Maybe it's your own execution. Maybe it's a mix of all of those things. But could you just unpack what gives you the comfort that you're beyond that and the drivers behind that?
I love what you laid out because it shows me you really pay attention to what we say because it's all those things. So I think the tech vertical today is about 25% of our base. That's down from a year ago, down quite significantly. It was about a third a year ago. Today it's 25% of our base. So we still have high exposure to tech, but it becomes a lower proportion of our overall base. The second thing about tech that I think is really interesting is they tend to be super early adopters of new technology. So actually, when we look at our products like AI Studio, and I'm sure Aziz will tell us more about AI Teammates, which I'm actually even more excited about than AI Studio, those tech customers are in many cases the initial buyers of those products.
And so I think the tech vertical, although it remains a headwind today, it's smaller overall as a proportion of the base. And I think what is a headwind today can actually ultimately become a tailwind for us as we look ahead. So I think it's certainly not a story of doom and gloom. And two of the really large renewals that I talked about in Q2 that renewed in Q3 were very large tech companies. So one was the largest CRM company that you could think of, and the other one was the HCM software extremely large company. And not only did they renew flat, they were expansions. So great for NRR too.
Yeah, that's really helpful color because there's been a number of high-profile tech rifts of late. So I'd love to hear what you guys are hearing from your customers in terms of SaaS expansion activity and some of the trends that you're seeing there. Perhaps it's that now these companies have been through a number of right-sizing activities such that companies are just leaner in terms of their software spend today overall than before. But why, despite some of these headlines, is that not a concern potentially?
Yeah, so one of the things in the tech vertical and non-tech vertical as well is we haven't seen customers come back for a second downgrade. So we're not seeing them come back for a second bite of the apple. I think the second thing is we've seen utilization across the board go up. So we're a lot healthier in our customer base as well, more well utilized. And then the third thing is we've become a multi-product company. So we have a lot more mitigants and the levers to offset downgrade pressure if they do have layoffs and need to reduce seats to introduce AI Studio to automate the workflows and the existing seats to introduce a paid services plan, which we call Foundational Service Plans, into the account to increase utilization and drive better adoption.
So we've actually seen with our FSP plans 20% higher utilization for those customers who are taking up those offerings. And so that's really encouraging for future retention. So a lot more mitigants and levers in place to offset that now that we're a multi-product company. We're not as dependent on seats. We're also driving a lot more deeper adoption of workflows, whether that be just rules-based within Asana or turbocharge with AI Studio. And when you're adopting those workflows, we're opening up to new use cases, new budgets. So that also diversifies us from seats and a reliance on seats. And it's going to open up over time a new revenue stream with consumption. So a lot more there over the past year as we've introduced new products and been really maniacal about driving better adoption and utilization of the platform.
Yeah, that's really helpful and appreciate all of that color. Another highlight of the print was you talked about for those smaller customers that you saw a high in terms of gross retention. Now, I know that area has been impacted by some of the SEO disruption and top-of-funnel disruption that we've seen from some of the changes with the rise of AI search. I think you also made comments on the call that you've seen quarter-over-quarter improvements in that.
And month-over-month.
And month-over-month, yes. So can you maybe talk about what initiatives has Asana put in place to mitigate some of that impact? It sounds like it's still a headwind today, but is there a period of time as you look ahead that you think you'll start to see that really lessening?
Yeah, so it's been a real focus of how do we mitigate that impact and take what's been a headwind and create a tailwind over time. So first, it starts with kind of our paid media and our marketing channel strategy. So we've diversified to be in more places where LLMs and AI search are sourcing their content and making their recommendations for us. So moving paid media spend to channels like YouTube and Reddit and Quora to be more visible. How do we structure our content with metadata and formats that are more visible and adoptable in an AI world? So things like webinars, ROI calculators, case studies, the metadata underlying that content. So how do we get picked up in a much more leveraged way? And then the other big area is just like, so now we're driving higher intent traffic. We see higher conversion from that.
How do we compound that with other things we can do in product to improve conversion? So PLG, and this is Dan has brought this to the table, another real emphasis on how do we reimagine the PLG customer experience. So we've actually brought in a new head of PLG. Our CPO is now kind of accountable for the PLG business. So that's really led to a lot of great changes on the in-product experience. How do we get our customers to that first, like Dan calls it, aha moment early in their journey where they're seeing value and they're finding that feature or that ability to set up Asana in that really effective way?
That's really helping kind of when they come to the website, when they get into a trial, and then post-trial to keep them retained because, as Sonalee said, that monthly base can be pretty churny, especially early on if they're not finding the way to leverage and harness Asana and how it's intended to be. A lot of goodness on the channels we're in, how we structure the content, and then when they're getting the site, getting the trial, getting the product, creating that world-class experience for them so that they stick and stay and expand.
Can I just come over the top for a second?
Yeah.
Yes, it continues to be a headwind, a headwind that we have reflected in our guidance. So we started talking about it, I guess, two quarters ago, but the Q4 guide very much reflects the fact that it will continue to be a headwind for the rest of the year.
Okay, perfect. That was helpful color. You talked a bit earlier that part of the offset, even if you are still seeing some headwind to seed expansion, is adding in these newer products, right? So you talked about AI Studio. I know in the past you've talked about Foundational Service Plans and more in implementing that into deals. So can you just give us an update in terms of adoption so far? I know there was some color on the call that you gave, so maybe you could recap that for the audience. And when you include those services into these deals, what kind of uplift do you see on that?
Yeah, so I think the comment we made on the call around AI Studio is continued strong momentum. So our bookings in the quarter were sequentially greater than the bookings in the last quarter. So continuing to build that ARR base in a nice way. Still small relative to our overall base, but scaling aligned to our internal expectations. We've also turned on self-serve for now a full quarter and seeing good adoption with our self-serve base. As we think about how that plays into the overall deal structure, it does accrete deal sizes. That depends on the size of the renewal or size of the land, but can be anywhere from sometimes they both eclipse the deal size to a small fraction.
So it is an important contributor, but I think the thing that we really are excited about is when they're adopted and used and people are building workflows or increasing their utilization of those service plans. It makes them stickier and increases the likelihood of them expanding seats over time. So we're getting that benefit on larger lands, benefit of downgrade mitigation, benefit of expansion, but we expect to see longer term that contributing to our NRR expansion. So it's really exciting, and we're really excited about adding Teammates to that mix.
Yeah, so let's talk about Teammates because I know that that's like an exciting offering that's coming up, and we're approaching the GA dates for that. So Teammates is the AI agent offering. You've had AI Studio, which is no-code workflow automation. Can you talk a little bit about how you're positioning both of those products? Do they complement each other? What are the big use cases? Which customer segments are they geared towards? How should we just think about that opportunity overall?
Yeah, absolutely. So we went beta with Teammates. We announced the beta launch at our marquee customer event, Work Innovation Summit in London, New York, just about a month ago in New York. So already 30 customers are in the beta. So this is like real production customers with real use cases. Morningstar, which is a really important customer of ours, is using Teammates for their marketing content creation around campaigns and have already seen processes that took two to three weeks to execute be boiled down to a handful or two of hours. So really, really powerful stuff, and so AI Studio and Teammates are highly complementary. So if you think about AI Studio, it's really about automating and supercharging workflows.
Reliable, structured, repeatable workflows, multi-step processes where in those multi-step, you have agents built in, we call them nodes, who are executing a part of that multi-step, handing off to a human in the loop. They're checking, iterating, and it's going back to the node. Where Teammates actually are complementary is now the AI Studio agents can hand off to a teammate within that workflow, and that teammate can hand off to another teammate or back to a human. They fit into that workflow structure really well where AI Studio is that backbone, and the teammates are coming in and helping automate within that backbone just right alongside a human in that process. Then the other cool thing is they don't have to operate in workflows. They can operate autonomous from workflows.
They can help you set up your Asana instance in a way that maximizes impact and value for you. They can start automating tasks that are persona-based or function-specific. So we have 12 different teammates that we've rolled out, including a marketing campaign analyst, a ticket deflection analyst, a data intake analyst, a project management analyst who can sit alongside a human and execute those tasks as a true kind of digital worker. And they're all built on kind of what we call the three C's, which really differentiate the teammates and AI Studio, which is context. They're pulling from the context of the Work Graph, the who, when, what, why, how, which is really that data store model that's a differentiator for Asana. So they have the context to be effective, to be accurate, to be cost-optimized. And then the controls and checkpoints.
So being able to give the right access controls, the right governance of humans in the loop, that's a real differentiator because you don't want the agents off doing anything and going to different projects that they may not really be privy to. So really powerful, great feedback from just 30 customers thus far. Really encouraging. It'll be a bigger driver next year, certainly the second half after it goes GA and we build pipe and awareness.
Yeah. And I know it's still early, right? You mentioned 30 customers that are in beta testing for it. But any early signals that you guys can draw on how that might compare to what you saw with AI Studio? So is the opportunity for Teammates as big as AI Studio? Could it ramp similar? Or how should we compare those two?
Yeah, so that's a great question. I mean, as you said, they're highly complementary, which I do believe, but I actually see Teammates, we see Teammates as being even a larger opportunity because I think in many ways, Teammates kind of democratizes building these workflows. What we found with AI Studio is that the early adopters certainly were those customers that were already using Asana for fairly sophisticated use cases and building workflows, using rules, building multiple workflows, truly like our power users.
Whereas I think Teammates, it just democratizes it. And Dustin won't like me for saying this, but it's like AI Studio for dummies. The Teammate can actually help you build the AI Studio workflow. And I think Teammates is much more general applicability. And the other thing about Teammates is they are more consumptive in terms of credits. So I think in terms of ARR ultimately driving kind of net bookings, I think it will actually be, well, it will be incremental, but also a larger opportunity. And going after, I think in some ways, different budgets, different use cases, use cases that perhaps were not classic Asana use cases. And that I love because it's taking us into new TAMs.
On that piece about the new TAMs, right, and it's taking you into areas that you historically haven't competed in, I guess. How is the competitive landscape evolving off the back of that? When you have customers that I know Teammates is still early, but when they are looking at Teammates, when they've evaluated AI Studio, who typically are they comparing those solutions to? Is it DIY? Is it other SaaS solutions, maybe AI natives? What does the competitive landscape look like there?
Yeah, so I wouldn't say that we've seen a big change in competitive landscape. In general, it tends to be the other CWM providers, so the ones that you call the Mondays, the Smartsheets, the Airtable, ClickUp, Wrike. Mondays is who we see more than others. I think what we have, we do feel it's truly differentiated. We do feel like we have a sizable lead. We think we're unique in that AI Studio and Teammates sit on top of the Work Graph, and that context awareness is unbelievably powerful. And kind of the fact that we have that, we have this horizontal application, whereas I think some of the competitors are more siloed and vertical. So we do feel like we have differentiation, edge, lead.
The other thing I would say is AI Studio and Teammates, although they're being introduced this year, they have been many years in the making. This was part of Dustin's original vision. I think these products truly bring our category into its own and into going from a really nice-to-have productivity tool to almost mission-critical because we're all going to have agents running around our organizations. People need to know who's doing what by when, including those agents, and Asana can help with that. We feel like this will actually extend our lead in terms of product leadership and competitive differentiation.
Yeah. And then in terms of how the pricing model is evolving off the back of this, I know this is a question that you guys get commonly, where historically the model has been very tied to seats and seat expansion, and now with the introduction of AI, that's changing. So could you comment, obviously we're in the early innings, right? But how are you guys thinking about monetizing AI and where that might go?
Yeah, so I think currently AI Studio is a platform fee where you get an allotment of credits, and then when you work through those credits, you kind of buy more credits. So it has a very consumptive angle to it, but it's not pure consumption. And we found that customers right now and how they're grokking AI and leveraging AI, that's a model that they can really get their arms around. It has a little bit more visibility and transparency into costs, and it's easier for them to adopt and create budget around. And so we've had success with that. Now, there's a lot of learning in terms of what's the right price per credit and how do we think about that. And so we're learning a lot about how our customers are using the product and what value they're driving, and that will evolve.
I think we're thinking about teammates in a similar way for right now, but over time, you could see that evolve into pure consumption. It's just how our customers evolve and when they're ready for that. I think right now it's kind of early to go that far.
Yeah, that makes sense. And then in terms of how AI is contributing to revenue today and where that could go, I think the original ARR number that you disclosed, I think it was $20 million, right? About a quarter or two quarters ago?
I don't think we ever disclosed that. What we said on ARR for.
On AI Studio?
Yeah.
No, I think we said, so it came out in Q1. We doubled sequentially in Q2, and then now we've grown incremental bookings in Q3. So not that big yet, but growing, but off a small base, so more meaningful as we exit Q4 and into next year.
Yeah, and the way I described it today in meetings, because that's a really natural question, and we were just actually during the meeting saying maybe we should disclose it separately. Right now, what we've committed to do is to give you updates at key milestones. But the way I think about it is, although when you're close, we're an 800 million ARR company. For a new product to actually make a difference as a percentage of your ARR takes time. But to make a big difference or to become a meaningful contributor to the net bookings you're driving, that I can already say it will be a significant and meaningful contributor to our bookings, our net new bookings for fiscal 2027.
As you made the point earlier, and I think you also talked about how it ramps because, of course, the first quarter, you're going to get just the early adopters, but by Q4, it's a much larger proportion of the base. I think we feel the same way about AI Teammates. What we saw with AI Studio, which was this consistent accelerating ramp, I think with AI Teammates, we get that in fiscal 2027. The larger impact is in the second half and Q4 as we exit.
Yeah, because I think some of the math that we ran was that on an ARR basis, exiting this year, it could maybe start to add a point to growth. And knowing that that's going to be revenue growth in the future, I guess the source of the question is that if the core business is stabilizing and AI now is going to start to become this incremental tailwind, is this potentially setting Asana up for a growth re-acceleration? So maybe you could just talk even at a high level. Does Asana have ambitions to see growth elevated even further than where it is today? And if so, what would be the building blocks potentially to get there?
Yeah, so that's a great question, and I see now how you mean I did talk about it being one percentage point additive to growth, so I see where your math was potentially coming from, but so one, yes, we do have ambitions to, and we believe that we can without any time. I'm not putting a time frame on it, and I'm certainly not guiding, but we do believe that we have the potential with the products that we have and the large opportunity in front of us to be able to re-accelerate growth and continue to drive margin expansion. What I would say is you've heard us talk about how excited we are about these new products and the incrementality. We do have headwinds that we're combating that we called out in the earnings call, and I like to be super transparent about those.
And we are continuing to experience those headwinds in the small business, PLG business, with top of funnel, which we are navigating, and the pressure is abating, but it is still there and remains a headwind. And we also still have exposure to tech. And although that has stabilized the pressure in that segment, it is still declining. So that continues to be a headwind. So I think when you take it all together, the picture is one that we're feeling encouraged by, but we're certainly not willing to commit to a time frame in terms of when that re-acceleration could happen. But I think the building blocks are there. I think we have a great team in place. I think our products are truly differentiated.
And it's the first time our sellers will be able to go into renewal conversations and actually have another thing to pull out of their satchels to put in front of customers. And it's something that is so powerful in terms of the value and outcomes it can drive for customers. We feel really excited, and guess what? We're investing behind it too. So you haven't asked about margins, but we drove significant margin improvement, and part of what we're doing is taking those dollars and those efficiencies and reinvesting them in our AI platform because we do think that there's runway to grow.
Yeah, that was going to be my last question to ramp it up is how we think about the margin trajectory from here because I know the comment that you gave on the call last night was, obviously, there's been tremendous expansion this year. So I don't expect the same level of expansion, especially as you try to reinvest to ignite growth. So could you just talk to, because there was such great expansion this year, where still are the incremental opportunities? And I guess even just as you look out, how do you think about balancing growth and margin and what the appropriate levels could look like going forward?
Yeah, so you're absolutely right. I kind of tried to curb back expectations for another 12% year-over-year margin improvement, and I don't think that's what anybody would want. It's not what's right for the business or our stakeholders, so there is more to do. I think two areas. One is just the footprint of our headcount. When I first arrived at Asana, an extremely large proportion of our headcount was San Francisco, New York, and for a company of our scale and financial profile, that did not make sense. So that's something we've started to tackle, and that has a couple of benefits. One is for every engineer that attrits in San Francisco, you can probably hire two and a half in Warsaw is our center of excellence for R&D.
But the other great thing is those engineers that you hire in Warsaw, they don't necessarily have the same expectations around stock-based compensation. So you didn't ask about that, but that's something that is top of mind and top of agenda for us as we look ahead. So I think there's more to do in terms of that footprint of our headcount, and we should be aligning ourselves to industry benchmarks there. And although we've made improvements and progress, there's more to do. And secondly, on the sales and marketing side. And I think marketing in particular is something that stood out to me. I think it's one of the reasons that Dan was the right CEO for us because he brings a lot of expertise in marketing. But just reallocating those marketing dollars into more efficient channels will be a big unlock as well.
So look, there is more margin improvement to come. But when you talk about balancing growth and margin, I would, any day, if you asked me, would you rather a point of growth or a point of margin? At this point, we have such great operating leverage inherent in the business because we have these 90% growth margins that I would take a point of growth. And that, in many instances, means we'll be reinvesting some of those efficiencies. But I think that is the right model and the right strategy to be driving.
Totally makes sense. Well, Sonalee and Aziz, thank you so much for the time. And everyone, let's give them a round of applause for taking a flight after earnings and making it to the tech conference. I appreciate it.
Thank you.
Thank you guys, and thank you all for joining.